Are Gold and Silver Prices on the Brink of Eruption?

In my September 16 column I listed several possible calamities that could eventually lead to sharply higher gold and silver prices. Shortly thereafter, the signal from the Federal Open Market Committee that it was planning additional inflation of the money supply (called quantitative easing) started prices upward. The FOMC formally detailed their inflation plan at the conclusion of their meeting on November 3.

If you look at the list of possible calamities in that column, you will see that none of them specifically have occurred—yet. However there are multiple major global problems on the brink of eruption right now that overlap parts of the list in my earlier column:

The government of Ireland is being bailed out by other European Union member nations, including the United Kingdom and Sweden (who are not participants in the Euro currency), to hold off the risk of a debt default. Investors are now worried that Portugal and even Spain will be next to need bailouts. Spain would be the largest economy of the Euro nations that could need help soon. Its potential financial woes would inflict more economic pain on the Euro than the recent troubles of Greece, Ireland, Iceland, and Portugal combined!

North Korea’s unprovoked attack on a South Korean island this morning, coupled with South Korea’s strong response, raised the specter of even more military conflict around the world.

JPMorgan Chase and HSBC now have at least 25 lawsuits filed against them alleging illegal gold and silver market manipulation. In particular, there may soon be a frenzy of demand for physical silver to try to cover the huge short sales on the COMEX.

Over this past weekend, The Wall Street Journal reported a widespread US government investigation of insider trading and market manipulation by investment advisers, investment bankers, hedge fund traders and analysts, and mutual fund traders and analysts. Yesterday, the Federal Bureau of Investigation raided the offices of three hedge funds as part of this investigation. The investigation had been rumored for months, but I had not previously seen enough confirming details to mention it earlier.

The US government sold some of its stock of General Motors this week, with the mainstream media reporting substantial disinformation. For instance, the US government was trying to claim that it may yet end up making a profit from bailing out GM, but only counting the outright direct bailout money. Including all the other forms of bailouts (such as transferring a huge chunk of the company’s retirement obligations on to taxpayers), General Motors has received more than $100 billion of aid. The sales of GM stock held by the government will only cover a small percentage of the total cost of the bailout. By the way, while I’m on the subject, it was quite surprising to see the Chinese wanting to overpay to invest $500 million in GM. Was there some backroom secret deal between the US and Chinese governments to get this “good news” to occur?

Last, but not least, the US government’s planned inflation of the US money supply has been clobbering the value of the US dollar. This has raised the fear of global currency wars, where major currencies will all lose value against gold and silver.

It would only take one or two of these or other major crises to result in soaring gold and silver prices. I had expected that gold and silver prices would be suppressed today going into the COMEX closes, as that marked the expiration of the latest round of COMEX gold and silver options. The North and South Korean troubles spooked investors, which kept gold prices mostly rising during US markets. The trading patterns look like the manipulators pretty much abandoned trying to use their resources to gun down gold, so they tried to double up in restraining silver. Unfortunately for them, that suppression was not very successful either.

With physical inventories continuing to tighten, I still think there is a decent prospect that the price of silver may end the month above $30. Even if this turns out to be premature, I expect to see silver at that price level before long.

Final note: I have seen several postings to my columns implying that my recommendations for people to acquire gold and silver are motivated by an interest in my own companies selling more merchandise. There are three major misconceptions in such a contention. First, since my first CoinUpdate column on February 19, 2010, the price of gold has increased by more then 22% and silver is up over 67%. So, my recommendations have been profitable to readers who followed them, no matter my motivation. Second, it does not help my companies to sell merchandise if what I write turns out to be inaccurate too often. Few people would want to deal with a company that was incompetent. Third, the general economics of rare coin and precious metals dealerships is that they make far more profits buying merchandise from the public than selling to them. Accordingly, to try to goose the short term profits of my companies, I would have an incentive to proclaim that gold and silver prices have peaked and are destined to fall in the near term—so sell now.

I have been through many market peaks and troughs during my 46 years as a coin collector and 37 years as a gold and silver bullion trader and realized substantial profits from being right more often than I was wrong (no one is perfect at market timing, or anywhere close to it). The information in my columns, which often contradicts what is reported by the mainstream media, is filtered through my personal experiences, backed up by being able to pick the brains of other very experienced traders and analysts, and results in recommendations that I follow for my own account. I don’t just write in a theoretical sense, I put my money where my mouth is. That gives me a very strong incentive to try to be accurate.

Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/ under “News & Articles”. His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.

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